Business Plan Basics

Athletes live by the credo, "No pain, no gain." Writing a business plan isn't a whole lot different. There just isn't an easy way to create a written business plan without a real effort on your part.

The contents of a business plan detail the history of your business, define how it operates today and explain your vision of how it will change in the future. It also includes how you intend to get there.

"It's difficult to define exactly what a business plan is," says Paul Havick, education director for the Iowa Soybean Association (ISA). Havick directs ISA's annual business plan seminar that's open to all farmers. "If you think of it in terms of a financial plan, it organizes your operational and philosophical management strategies into current, intermediate and long-term categories. It also identifies the opportunities and challenges your business will face in the future."

In its simplest terms, the purpose of a business plan is to describe the success of your business, according to Havick. "In the process of writing your business plan you may discover you would like to have more to write about."

There isn't one right way to create a business plan. One of the newest ones available is from ag economists at the University of Nebraska (NU). In 1997, they developed a computer template for hog producers that they use at workshops. They will have a similar computerized business plan available for crop producers early this spring. Both programs include case studies for farmers to use as examples.

The business plan checklist on the next page is suggested by Al Prosch, business management coordinator in the NU ag econ department and a farmer for more than 20 years.

"You don't have to have a business plan to survive. But you better have deep pockets and be incredibly lucky in your decision making if you don't have one," he says. "If you're young and want to farm for another 30-40 years, I wouldn't leave home without one."

The Nebraska model follows a logical sequence. It starts with an Executive Summary that gives an overview of your operation. A Production Plan includes details of what you grow and how you market it. A Financial Plan defines your current financial status, including financial ratios and a balance sheet. And a Human Resources Plan explains who will provide the management and labor necessary to make the business plan work.

The program requires Microsoft Office software to operate. It provides all the categories of information required for your business plan and provides space for you to fill in the information. When you're done with the computer program, you can print it and add other material to it as needed.

"The business plan we've put together is a good place for a beginner to start, but it works equally well for farmers who are used to doing financial analysis and planning," says Doug Jose, NU ag economist. "It's set up to create a basic plan of operation for a farmer without becoming overbearing."

While they're listed as optional, it's a good idea to include a general description of your farm, an equipment list and site diagrams in your business plan, says Jose. "Those segments aren't so much for the farmer as they are for lenders and other vendors you do business with. But they're a good check to make sure you've included all your inventory in the plan."

Also listed as optional for the opening section of your business plan is a Strategic Outlook.

"There are pros and cons to including a Strategic Outlook," says Jose. "It's important to be able to define the industry environment that you're working in. But I think it's more important to be able to define how you intend to run your own business instead of getting bogged down guessing at what might happen to agriculture as a whole."

Most business plans, like the version Nebraska offers, each include an Executive Summary that describes your business organization (or statement of ownership), a mission statement, the purpose of the plan and a list of broad goals.

Jose emphasizes that none of these segments need to be lengthy.

* The statement of ownership usually includes the history of your farm as an explanation of how it got to where you are today. "It doesn't have to be long. It isn't for yourself; it's more important for the companies you do business with," he says. "It should help them to understand where you're coming from."

* "The mission statement is an opportunity to explain your values that the farm business helps support," says Jose. "For example, you might include that you want to remain conservation-minded, or that community involvement is an important part of your life beyond your farm business."

* The purpose of the plan section might contain several types of information, says Jose. "If the plan is primarily for yourself, you might explain why you want to expand or refinance, for example. There may be times when you want to list goals that the plan is aimed at, or if the purpose of the business plan is to communicate your plans to others, you can state in this section who specifically the plan is written for and why."

* Written goals in the Executive Summary should address the broad view of your operation, according to Jose. They should include what kind of farm business you want it to be and how you want it to be structured. "Goals with three- to five-year time lines are the most realistic," he says.

You likely already have quite a bit of the information that you'll want to include in the Production Plan section of the business plan. In this section, your goals should be restricted to the next crop year and be specific. "You need to prioritize your top one or two goals," Jose says. "If you list too many, nothing gets done."

The Nebraska Business Plan includes, but doesn't emphasize, a marketing plan, points out Jose. "Our program prompts you with the questions that need to be addressed before you put a marketing plan together. A marketing plan is a very detailed process, and we didn't want it to overshadow other important areas of the business plan. Farmers who have detailed marketing plans, however, should include it."

In the risk analysis section of the Production Plan, you need to evaluate how much risk exposure you have from a production point of view and also calculate a range of price expectations, Jose says.

If you don't have good financial records, the next section of your business plan, the Financial Plan, is going to be challenging. You need to be able to document your farm's financial performance for the past three to five years, produce a current balance sheet and use the data to establish the trend for how your balance sheet has changed over that period. You'll also need that information to calculate the six financial ratios that the business plan calls for.

Based on that financial information, you need to write a paragraph or more that defines your current financial position and the goals you have to change it in the next production year, according to Jose. If you have additional documentation, such as an income and expense statement or trend sheet, cash flow plan etc., you should add those to your business plan also.

Your financial data will become increasingly important as farming continues to become more capital intensive, says Parman Green, farm business management specialist at the University of Missouri. "You're going to have to be able to sell your farm business plan to the capital market," he says.

"The day of going in and asking for a loan without documentation is going to end. As bank consolidation continues, lending decisions will more likely be made by a loan committee at a distant location. There will be less personal knowledge about individual farmers so the decision will be based on documentation."

Green has put together a list of materials he believes should be included in a farm's financial folder and business plan. (See information below.)

Now that you've defined your business, detailed how you intend to grow and sell your crops and/or livestock, and explained your financial plans for the future, you need to explain how all that work is going to get done.

"The first thing you need to do is define the specific jobs that need to be done and what the responsibilities are," says Jose. "Then you need to explain who will do those tasks. You need to define the role that each member of the family has and his or her time commitment. That's a big step."

He suggests that you also include benefit plans and an employee handbook in your plan if you have those.

If you still question the value of a business plan, think of it in this perspective: "Farmers spend hundreds of thousands of dollars to have the latest technology and equipment. The effort to manage that investment shouldn't take a backseat," says NU's Prosch. "With a business plan you understand the risks to that investment and are better able to adjust."

For more information on business plans, contact Doug Jose or Al Prosch at H.C. Filley Hall, Ag Econ Dept., University of Nebraska-Lincoln, Lincoln, NE 68583. Their software will be available for the cost of shipping it.